Hawaiian Holdings Inc (HA) 2015 Q1 法說會逐字稿

Good afternoon and welcome to the Hawaiian Holdings first quarter 2015 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Ashlee Kishimoto, Senior Director of Investor Relations. Please go ahead.

Thank you, Operator. Welcome, everyone, and thank you for joining us today for Hawaiian Holdings' financial results for the first quarter, 2015. On the call with me today are Mark Dunkerley, President and Chief Executive Officer; Peter Ingram, Chief Commercial Officer, and Shannon Okinaka, Chief Financial Officer. Mark will begin with some overview comments. Next, Peter will take us through revenue performance. Shannon will follow with a discussion on costs and the balance sheet.

We will then open the call up for questions and Mark will make some closing remarks. By now, everyone should have access to the press release that went out at about 4 o'clock eastern time today. If you have not received the release, it is available on the investor relations page of our website, hawaiianairlines.com. During the course of our call today we will refer to adjusted or non-GAAP numbers and metrics. A detailed reconciliation of GAAP to non-GAAP numbers and metrics can be found in our press release. Before we begin, we would like to remind everyone that the following prepared remarks contain forward-looking statements, and management may make additional forward- looking statements in response to your questions.

These statements do not guarantee future performance, and therefore undue reliance should not be placed upon them. For a more detailed discussion of the factors that could cause actual results to differ materially from those projected in any forward-looking statements, we refer you to Hawaiian Holdings' recent filings with the SEC, including the most recent annual report filed on Form 10-K, as well as reports filed on Form. And it may be cut short and just stuck here I may have really got with that, I would like to turn the call over to Mark.

Thank you, Ashlee and aloha everybody, and thank you for joining us. A $35 million, $0.38 per share results were a record for our company in the seasonally weak first quarter. Low fuel prices and strong demand across our network combined to more than offset the impacts of a strengthening U.S. dollar, declining fuel surcharges in some markets and an increase in industry capacity between North America and Hawaii.

As a consequence, we have been able to further strengthen our balance sheet to the point where, today, we are pleased to announce a share buyback program covering $100 million or 8% of our outstanding shares at today's share price. Our outlook remains positive and we continue to expect record profit margins, positive free cash flow, and the further strengthening of the balance sheet as the rest of 2015 unfolds.

As always, our employees are at the forefront of our accomplishments. Their performance makes our financial success possible, and they have my undying thanks. Since we last spoke, there have been a number of developments worthy of mention. In March, we completed the refurbishment of our first Boeing 717 with a new interior and a consistent layout of 128 seats. This aircraft is used exclusively for island - for flights between the islands of Hawaii.

Today there are seven of our fleet of 18 aircraft flying with the new interiors, and by the fourth quarter we will have completed this transition. The higher seat count has the double-barreled benefit of giving us more seat capacity during the peaks of our neighbor island operation, while at the same time reducing our unit costs. In the quarter we also made significant progress in towards de-levering. We repurchased 73% of our convertible notes which, when added to the convertible notes repurchased in the fourth quarter, means that at quarter's end, 91% of the original outstanding amount has been retired; This has reduced not only debt and future interest payments but also it has removed future dilution from our existing shareholders.

We ended March with a liquidity ratio of 28% and our adjusted debt to EBITDA ratio sit at 3.6 times, falling within our range for leverage of between three and four times. It's been a very good quarter for our business in all kinds of ways. Good results, progress in strengthening our balance sheet, and initiating direct shareholder-friendly programs. To add more color on all of this I'll turn the call over to Peter who is going to discuss our revenue performance, before Shannon covers the finances section.

Thanks, Mark. First quarter operating revenue grew to $540 million on a capacity increase of 4.7%. RASM came in at the positive end of the guidance we issued towards the end of the quarter and better than our expectations at the beginning of the quarter. This improvement versus expectations was the result of stronger bookings on both domestic and international routes during the quarter and was further supported by very strong results from our cargo business.

Our business is performing well, with margins expanding throughout the business. Our network is well positioned in both established and growing markets to weather environmental challenges including a stronger U.S. dollar, lower international fuel surcharges and industry capacity increases, and we are strong position competitively from service and product perspective.

Let me cover a few of the commercial highlights. Firstly our neighbor island network remains an area of strength. The completion of our 717 modifications also further enhance our product offering and competitiveness, providing additional capacity for peak demand flights, while reducing our unit costs. The full benefits of this won't be realized until later in the year when we have a 100% consistent fleet with expanded capacity, but as we achieve a critical mass of reconfigured aircraft over the summer we will be able to increase seat availability on peak flights.

Secondly, our international performance has continued to benefit from the network adjustment we' made in the first half of 2014 and the maturation of the routes we have started over the last few years. We are seeing year-over-year unit revenue improvements on the majority of our routes absent the foreign exchange conversion and fuel surcharge impacts. Awareness of the Hawaiian Airlines brand is strong and growing, and Hawaii enjoys resilient demand for travel through - l from throughout the Asia-Pacific region. Thirdly, we continue to see growing revenue from value-added products. In the first quarter, our sales of value-added products were $21.32 per passenger, and increase of 28% year-over-year.

Sales of HawaiianMiles were a big contributor here, highlighted by the improved economics of our co-branded credit card relationship that we will lap in the second quarter. We also continue to make gains with the extra comfort seat product that we launched last August. Extra comfort remains an unqualified success, and based on strong demand for the product we were able to adjust prices during the first quarter, which will provide incremental improvement throughout the year. Growing margin accretive non-fare revenue remains a key focus for the periods ahead. And in that context we look forward to the launch of our redesigned website in the second quarter, which will help us market these products and others we are developing even better.

Lastly, and as I mentioned briefly at the beginning of my comments, our cargo division had another excellent quarter, bolstered unexpectedly by the dock slowdowns on the west coast in February, which redirected some cargo shipments from sea to air during the period. By the end of March, most of these one-time benefits abated, and going forward we expect to settle into a more modest period of growth.

While the demand environment remains strong, there are some factors pressuring unit revenue. Industry capacity between North America and Hawaii was up double digits year-over-year in the first quarter, and is expected to be up similarly in the second quarter based on published schedules. We entered the first quarter, which is generally a trough seasonal period aside from the first couple of weeks of January, behind our book load factor target.

During the period bookings strengthened but not enough to fully overcome a tougher year-over-year pricing environment and the initial deficit and book load factor. Looking forward we expect to see sequential improvement over the low point we had in the first quarter. Although the industry capacity situation remains similar in the second quarter, we are moving to a seasonally stronger period and our book load factor is flat to positive across the three months.

As a result, we expect better North America unit revenue performance in the second quarter than the first, especially as we get to the beginning of the summer season in June. Looking to the peak summer months and beyond, the capacity environment improves with growth levelling off to mid-single digits for the second half of the year. Internationally, we continue to see the impact of a stronger U.S. dollar, lower fuel surcharges in some of the countries we serve, and pockets of industry capacity pressures. In the first quarter, fuel surcharge and currency differences totaled about 3 percentage points of system RASM impact year-over-year, and in the second quarter we are expecting the impact to total a little over 3.5 percentage points.

Importantly, we are seeing year-over-year improvements on the majority of our routes, absent the foreign exchange conversion and fuel surcharge effects. In addition, the overall profitability of our international network is meaningfully enhanced by the powerful impact of lower fuel prices on long haul services. And as a note, we continue to hedge our foreign currency exposure with the use of forwards and for the remainder of the year we have hedged approximately 50% of our yen and Australian dollar exposure at better levels than today's exchange rates.

Finally, with our balanced network of mature and growing markets and even stronger -- ever stronger value-added services, we are well positioned the to react to changes in market conditions. Our people continue to provide superior service, and our product is ideally suited for long haul leisure. All of this gives us abundant confidence as we look to the balance of 2015. With that, let me turn the call over to Shannon to discuss our costs and the balance sheet.

Thank you, Peter. As Mark mentioned earlier and to recap the quarter, adjusted net income grew from a net loss position last year to $24.7 million, or $0.38 per share. Adjusted net income this quarter excludes the non-cash mark to market impact on outstanding fuel hedges totaling $8.9 million on a pre-tax basis, and the loss of the early retirement of our convertible notes totaling $7 million pre-tax.

Our earnings per share this quarter reflects the additional dilution of 9.8 million shares related to the convertible notes and associated warrants. Given the significance of the convertible notes we purchased to date, the related dilution may appear to be high. The way this works is that the diluted share balance is based on the weighted average days the shares were dilutive.

So, for example, if the notes were repurchased on January 1st, instead of throughout the quarter, our diluted share count would be 3.3 million lower, and our earnings per share would be $0.02 higher. The related call spread, which provides us the economic benefit of the spread between buying shares at $7.88, and selling at $10 remains in place.

Although the dilutive effects of the warrants are economically neutralized and will have no dilutive impact to actual shares issued, GAAP requires us to reflect an additional 5.8 million shares in our diluted share count this quarter, which will continue until the call spread is exercised or expired. To summarize, if we had repurchased the convertible notes on the first day of the quarter, and adjusted to eliminate the non-economic dilution of the warrants, our share count would have been 55.8 million shares or a $0.06 improvement to EPS.

This quarter's strong financial performance resulted in improved profitability and reflects the continued strengthening of our business. Our adjusted pre-tax margins for the first quarter grew to 7.4%, and we had a pre-tax ROIC of 19.4% for the trailing 12 months ending in the first quarter, both of which are strong results in a seasonally weaker period.

Turning to costs. Our first quarter total operating expenses, excluding fuel, increased $14.1 million from the prior year on a 4.7% increase in capacity, which resulted in a 0.6% decrease in (inaudible) fuel year-over-year. These results were in line with the revised guidance range we gave at the end of March, but better than original expectations.

This favorability was primarily due to a number of one-time cost reductions and a shift of certain maintenance expenses to later in the year. Lower fuel prices in the first quarter led to a decrease in our economic fuel expense of $45 million year-over-year, which reflects offsets from realized losses on our hedges and a 3.3% increase in consumption. Economic fuel costs per gallon for the quarter was $2.21 as compared to $3.10 in the prior year quarter, a decrease of 29%.

Turning to the balance sheet, we ended the quarter with $488 million in unrestricted cash, cash equivalents and short-term investments and an additional $175 million available under our revolving credit facility, which resulted in a liquidity ratio of 28% of trailing 12 months of revenue above our target of 23% to 25%. As Mark mentioned earlier, our financial position afforded us to repurchase $63 million face value, or 73% of the convertible note principle balance outstanding during the quarter.

This reduced our leverage to 3.6 times on an adjusted debt to EBITDA basis at the end of the quarter, achieving our target of between 3 and 4 times. Our first priority for capital allocation was to de-risk our balance sheets through reductions of leverage. We will continue to manage leverage levels and make investments in our business for our long-term operational success.

In addition, the newly announced $100 million share repurchase program is an important initiative to further increase value for our long-term shareholders. Our current and expected future profitability affords us the opportunity to provide more direct returns to our shareholders, while ensuring we maintain a sustainable and healthy business.

We also continue to evaluate contributions to the pension funds along with the other cash needs of our business, and during the quarter we contributed $13 million to our pension and other post retirement plans, which was $7 million above our minimum funding requirements for planned year 2015.

Looking ahead to the second quarter and full year, RASM is expected to decline 1% to 4% year-over-year in the second quarter on a 3% to 5% increase in ASMs. To recap what Peter mentioned earlier, the second quarter year-over-year revenue outlook is comprised of the following; Sequential improvement in North America unit revenues and relative stability on neighbor island routes, good momentum in our value-added products, the lapping of some of the positive network changes last year and the improved economics of our co-branded credit card arrangements, and continuing headwinds from foreign exchange and fuel surcharges in the international space, without which the year-over-year system RASM would be about three and a half points better.

CASM's fuel is expected to increase 0.5% to 3.5% year-over-year in the second quarter, and for the full year we continue to expect [CASM] fuel to be up in the low single digit range, specifically, 1% to 4%. In the second quarter, specific drivers of the year-over-year CASM and fuel increase are as follows; Higher pension expenses resulting from a decrease in discount rate and change in mortality assumptions, as well as contract wage increases totaling 2.5 percentage points, and an increase in aircraft rent expense with two new A330 leases financing our February and April deliveries and lease return cost accruals for two B767s departing the fleet in the second and fourth quarters totaling 1.5 percentage points. We continue to identify and invest in cost savings opportunities. We expect a full year effective tax rate between 38% to 40%.

Based on our current outlook we expect to become cash taxpayers in 2015 as our net operating losses related the to the bonus depreciation for the A330 aircraft we've purchased are expected to be fully utilized during the year. Based on the forward fuel curve as of April, 2015, we expect our second quarter and full year economic fuel price per gallon, including and hedges, to be in the range of $2.10 to $2.20. Our hedges expected to settle in the second quarter are currently at a loss of $16 million.

We expect our fuel consumption to be up 2% to 4% year-over-year for the second quarter, and continue to be up 1% to 4% year-over-year for the full year. Based on the current outlook, we expect fuel savings net of hedges and volume increases of $50 million in the second quarter, and $200 million for 2015, which, as Mark mentioned earlier, more than offsets the international revenue headwinds from the fuel surcharges.

We continue to expect our full year CapEx to decrease significantly from 2014 to a range of $45 million to $55 million. As a reminder we will be financing all A330 deliveries this year through sale leaseback arrangements. In conclusion our outlook for 2015 is for record profitability. The strategic investments we've made over the past few years, lower capital commitments, and the tail wind of lower fuel prices position us for expanding margins, continued earnings growth, and (inaudible) increasing free cash flow, which we will commit to reducing our financial leverage and increasing long-term shareholder value.

This concludes our prepared remarks. And with that, I will turn the call back to Ashlee.

Thank you, Mark, Peter and Shannon, and thanks to all of you for joining us today and for your continued interest in Hawaiian Holdings. We are now ready for questions from the analysts. As a reminder please limit yourself to one question, and if needed one follow up question. Operator, please open the line now.

At this time we will be conducting a question-and-answer session. (Operator Instructions). Our first question is from Hunter Keay with Wolfe Research. Please state your question.

Hi, Mark.

Hi, everybody. How are you?

Good.

Can you guys be so kind as to provide us PRASM growth by geography again?

Yeah, Hunter, this is Peter. I'll take that one. Let me go through each of them. North America, I'll start out there, was a high single digit deterioration in PRASM during the first quarter year-over-year. And that's on lower load factors and lower yields. You look into the second quarter on that one, as we said in the call, we expect sequential improvement, and we come into the quarter in a better position bookings-wise than we were three months ago when we talked to you looking at the first quarter. Neighbor island remains pretty stable and was basically flat year-over-year in PRASM. And we have a similar outlook for neighbor island going forward.

As we said, it remains an area of strength. Internationally, we came in with a low single digit deterioration year-over-year in PRASM in 1Q, and looking forward to the second quarter, as we lose the benefit of some of the network changes that we lap in the year-over-year numbers, and we see a slightly greater impact from the fuel surcharges and the currency impacts, we expect that to grow to a slightly large PRASM decrease in the second quarter.

Thanks, Peter. Appreciate that. And early this month you guys created a position, I think the position is new, called the Director of Strategic Initiatives. And you said this person was going to oversee some high impact strategic projects. I'm wondering, and the background appears to be very military-oriented, and I'm kind of wondering what you have in mind for that.

Okay. That's actually part of our transformation team. We actually used that as a place where we -- it's a group of people that we bring in from outside the Company, who have unique backgrounds and skills, and we deploy them on projects that we think have some sort of interest and potentially transformational qualities to them.

We -- the expectation for that group is that within a couple of years they move into the organization into regular managerial roles. It's not actually a new position. We have had this position before. Actually, a couple of our VPs today formerly had this kind of role. So I wouldn't read too -- it's great to have them. It's great to have the team but I wouldn't read too much of it into -- into it in terms of some great departure.

Okay. I got you, Mark. And it just last quick one here. Shannon, I'm sorry. Can you help me with the model a little bit? You said the diluted share counts would $55 million. Was that a balance sheet? Is that balance sheet share count right now at the end of the quarter, and how should we model the diluted share count going forward? Thanks for all the time. Okay?

Yes, that's the diluted share count, so the second quarter diluted share count will be lower, and you can probably use low 60s, maybe, once we're taking the full quarter of the repurchases into account. You wouldn't really do anything with the warrants at this point with the cost spread piece at this point. That would still be there.

Okay. Great. Thank you very much, everybody.

Thanks.

Our next question is from Helane Becker with Cowen and Company. Please go ahead.

Thanks, Operator. Hi, guys. Thanks for the time. So I just have a few questions with respect to capacity off the west coast, I guess, into Hawaii. So listening to other airline conference calls over the past few hours, I suppose, I'm hearing them talk about pressure in the market and pricing pressure. And you're really not seeing that. Is that -- can you just like talk a little bit about what strength you're seeing relative to what weakness they might be seeing? Do you think you're growing share?

Yes. So first of all, Helane, as I think we've talked about for sometime, there is quite a lot of industry capacity growth coming off the west coast. Equally as we've mentioned before, we like our combination of product and cost better than we would imagine other carriers like theirs in this marketplace. We tailor what we do to Hawaii. And as such, in these sorts of circumstances we tend to suffer from the industry dynamic or benefit from the industry dynamic, but tend to perhaps suffer a little less than some of our competitors do, given our better positioning in the marketplace. Let me pass that to Peter to see if he's got any added color.

I think I would just add that we have seen the industry capacity go up through the last couple of quarters, and it continues through the second quarter as we said during the call. And you can see from our -- the North America revenue numbers that I just gave out in response to Hunter's question, that is -- has put some pressure on, particularly in trough periods, but I think we're withstanding that pressure well. We're well positioned competitively. We are optimistic as we go into the seasonally stronger period for sequential improvement in the second quarter. And, of course, we're benefiting, as all carriers are, from lower fuel prices in this period. So I think all of that contributes to the record performance that you saw us post here for the first quarter.

Okay. Thank you. The other thing I'm kind of wondering about is in international markets. Remember a couple of years ago at Investor Day you talked about growth internationally, and how that was going to help you to diversify the route network. And you know, I'm just kind of wondering, here a couple of years later you've had to readjust some of your capacity in international markets because some of it hasn't gone as well as you thought. Do you think that you would continue to look for opportunities, or can you maybe update us on some of the newer markets like China where you -- I don't know how -- I think we're almost a year into that market. And so on?

Yes. Happy to do so. But we are, we're celebrating the year in Beijing at the moment. We've got a team over there, creating some festivity around that,. So yes, good recollection. So if you look back to when we first started talking about our desire to grow our international presence, our international revenues accounted for about 6% of our total network, revenue-based. At the high point we got up to about 33%, I want to say. And now we're down at about 25%. A lot of that has to do with the changes in exchange rates and so forth, because that, obviously, reflects how we report our dollar -- the dollar value of our international revenues. On to your question of, you know, do we think that we've somehow kind of run out of steam on that, or do we have ambitions to continue to grow it as a percentage of our total activity, the answer is relatively straightforward. We do actually think there's some additional international opportunities that are out there. We have very recently, as many people have seen, applied for (indiscernible). It was one such opportunity we applied for. We are actively looking at a couple of others. I think our sort of art of international expansion has cooled a little bit because of the U.S. dollar exchange rate, but, strategically, if we take a kind of longer term view, we still think that a growth in our international network is the, right thing for Hawaiian and we are quite happy to bide our time and work on that as opportunities present themselves and when the economic conditions merit it.

Okay. So if you thought the dollar was going to stay strong for five years, would you still have that view?

Yeah, I mean, I think we've articulated that we kind of like where our international network is now. We're not suggesting any cutbacks. Some of our competitors have suggested cutbacks. Indeed, as I mentioned, we've even applied for some additional service. So yes, even in the current environment we are long-term bullish on international. We're not quite as sort of rabidly bullish as we were a couple of years ago but we are still very enthusiastic about it.

Great. And you're obviously bullish on your stock.

We are.

Thank you. Thanks, Mark. Thanks for -- and Peter. Thanks for the help.

You bet.

Our next question is from Andrew Didora with Bank of America. Please state your questions.

Hi. Thanks for taking the questions here. This one is for Peter. Thank you for the color on the summer bookings. I thought that was really helpful. I'm curious, given how the close-in bookings track better than you expected in 1Q, how these close-in bookings trended of late, maybe, particularly, in the early April and around the Easter holiday? And then just curious in terms of how you're baking this into your 2Q guide. Thanks.

Yeah, you know, in the last two, three, four weeks I think the bookings have tracked fairly stable. There's a little noise in some of the year-over-year numbers because when you hit a holiday period, like around Easter, it tends to be a slower booking period. And, of course, that isn't synched up perfectly year-over-year. So we tracked a little behind during the period when Easter was running. And now we're tracking a little bit ahead during the period when Easter was last year. So you have to adjust for a little bit of that noise. I think the important thing for us is that we are better positioned coming into the period than we were three months ago. And if you had a do-over and could go back in time six months, we probably would have positioned ourselves better for the first quarter. That's in the rear view mirror now, and we're looking forward and making sure we're managing the business appropriately for the conditions that are out there today.

Great. That's helpful. And then just in terms of the summer bookings, I guess at this point in time of the year, I guess what percentage of your budgeted load factor is already on the books for, say, June, July, August?

So for going into a month, we are probably booked to more than three-quarters of what we'll fly in that month. It tails off going forward, but if you looked into June, July, August, off the top of my head without looking at the figures right now, we are probably sitting between 30% and 50% of what's on the -- what is on the books for that period now is 30% to 50% of where we'll end up. And that ratchets in over about a 90 day to a 120 day booking period, which is really where the meat of the bookings come in.

That's great. Thank you very much.

Sure.

The next question comes from Joe DeNardi with Stifel. Please go ahead.

Hey. Thanks very much. Mark, can you provide a little bit of color on how the board got to the authorization that you decided on the $100 million and what the timetable is for going through that?

Yes, I can give you a little bit but, obviously, not too much on the nature of the deliberations of our board, and the future planning on the timing. First, let me take it in reverse order. The authorization is for $100 million for a two year program. As you'll be familiar with, that gives the Company some flexibility within that time period to decide how much to buy and when to buy it. And it wouldn't be appropriate for us to share the details of that. That's kind of customary. In terms of why the board decided to do it, in some respects, I mean, I think we're not -- there should be very little mystery about it. Last fall we explained what our balance sheet strategy was. We articulated some targets around the appropriate levels of cash for our business, and the appropriate level of leverage. And you know, that -- we saw that as a very high priority. Some people who have followed us were perhaps a little critical that we weren't more optimistic earlier. But we very, very clearly articulated what we wanted to do with our balance sheet. Having achieved that with the balance sheet, that gives the board the flexibility to think about alternative uses for cash over and above those needs, and this is what they have determined to do.

Okay, thanks, Mark. And, Shannon, on the -- I think you said you'll be a cash taxpayer in 2016. Can you maybe just quantify what the -- I guess the year-over-year headwind will be from a cash flow standpoint? Is it -- will it be a full year of paying cash taxes?

So one correction on that, we're expecting to be cash taxpayers in 2015, and I can't really give you the amount of cash we're expecting to pay in 2016 versus 2015, I can tell you that our NOLs currently are at $420 million.

Okay. Thank you.

The next question comes from Mike Linenberg with Deutsche Bank. Please state your question.

Hi, everyone. This is Ashley (inaudible) in for Mike.

Hey, Ashley.

Hi. So clearly you've done some work here on capitals deployment, but my math, especially considering your late CapEx plan for this year, you still have considerable free cash flow post these purchases. So I was wondering if you could walk through your plan for your uses of cash now that the share REPO has been announced. Do you see opportunities, for instance, to buy back more debt?

Yeah, I think somewhere in our prepared remarks we've talked about a continuing desire to delever. And we are -- there will be opportunities to do that. We do have debts out there associated with aircraft, and other bits and pieces, and when we can find attractive terms to retire some of that debt with cash that is otherwise excess, then we would logically take advantage of that.

Okay. Great. And then my second question is about competitive capacity. Now, earlier this morning we heard from one of your competitors that they're considering the introduction of more triple sevens on West Coast to North American routes,, you know, another competitor not too long ago officially announced plans to commence service to Hawaii. So I was wondering if, big picture, if that changes your calculus with respect to evaluating the west coast-Hawaiian market for future growth opportunities, and if competitive capacity pressures, as you've spoken to on this call, if they continue to escalate should we expect that part of your network to shrink, and do you have flexibility in your capacity plan to trim capacity there if necessary?

Okay. Let me, again, take that in reverse order. Yes, we do have flexibility to make changes in terms of the amount of capacity that we operate and where we distribute it. So we do have flexibility. We don't have endless flexibility but we've got quite a bit of flexibility that would allow us, if we so chose, to trim capacity on any one of our kind of route clusters. As to what do we think about these -- this additional capacity that's been announced coming in, I would sort of refer you back to what I said, previously, which is that from our perspective, a competitor seat is a competitor seat is a competitor seat. We're really pretty indifferent about whether that seat is operated by brand A, brand B, brand C, or whichever airline. So we do take a lot of notice as to what industry capacity is. But whether it is a legacy airline operating a wide-body or a new entrant airline with a new type of product, we like our kind of relative positioning in the marketplace. And that leads us to believe in those circumstances where capacity ends up exceeding the demand to fill it, it tends not to be our capacity that is the marginal capacity. It tends to be the marginal capacity of other players. And if you look at the history of this market in the kind of modern era, the last ten years or so, I think what you will find is that our capacity has been generally stickier. Not because we're stubborn, but actually because other players, if they make rational decisions, tend to lose the marginal capacity a little faster than we make that decision.

All right. Very good color. Thanks, Mark.

You bet. Thanks, (inaudible).

The next question comes from Steve O'Hara with Sidoti. Please go ahead.

Hi. Good afternoon.

Hi, Steve.

Just going back to the convert one more time, if you ended up buying the entire issue, what then happens to the warrant? And is there a way to kind of remove them from the diluted share count by -- I don't know whether you would have to take some sort of a loss or something like that, but I'm just wondering, you know, is there a way to kind of get them out of that diluted share count. Also what happens if the stock moves up from here? How much dilution is added back in?

Hi, Steve. It's Shannon. I'll take that question. The call spreads are a different instrument from the converts. So yes, we can -- so we can treat them separately. And so we could, if we wanted to, take them out and, like you said, remove the dilution. But on that piece, you know, we believe that over time, in addition to higher share price, the call spread value would continue to increase. So because since we didn't need the cash from the call spread to fund our repurchase of the convertible notes, we just chose to keep them in, we could, you know, between now and first, second quarter of 2016, before they expire, you know, take them out which would remove that (indiscernible) dilution.

So typically it's -- the dilution that you're seeing in EPS from these are not economic. It's a GAAP thing where we can only look -- where we look at one side of the dilution but not the anti dilution. It gets into a lot of the accounting complexities, but you're right that as the share price increases the dilution on those would also increase.

Okay.

Yes, as the share price increases, the dilution increases.

Okay. And then just quickly on the other expense line, there was -- it's about 2.9. And I think that's related to the FX hedges. Is that correct? What happens is you -- does anything -- does that get reduced as you lap anything? Or is it kind of -- is that kind of a good number to use going forward?

You know, it's two things, Steve. One is the -- one part of it is the hedges, but another part of it is the translation of our foreign bank accounts, and, you know, foreign denominated balance sheet items converting into USD. So that -- I mean, I don't know that I would extrapolate this quarter's translation into the future. You just have to follow the market, I believe, on those.

Okay. I guess maybe a stable relationship between the dollar and, you know, would that mean that that number would be the same? Or does it depend on what happens to it during the quarter?

Yeah, it's really what happens in the market. I mean, the balance sheet is a point in time, so it depends how much cash we have in the foreign currencies at that -- on that date.

Okay. All right. Thank you very much.

The next question comes from Michael Derchin with Sterne Agee CRT. Please state your question.

Oh, Hi, guys.

Hi, Mike.

Great quarter! Particularly after the last quarter call. Can I ask you about the intra-island operation, which we know in itself is kind of an annuity of sorts? But what is the effect of that business, which you dominate on your long haul operations, both from Asia as well as North America? In other words, to the since, you have that, and others don't fly to Hawaii, how is -- are you able to leverage that as a mode of sorts against the competition?

Hey, Mike. This is Peter. I'll take that one. The fact of the matter is the neighbor island operations is a real network asset to us. It is very important for transporting local folks between the islands on regular business, but it is also very important to our network in terms of giving us the breadth on our Honolulu and Maui flights of being able to connect people to all the other islands. And that is valuable, as you suggested in your question, for the west coast; it's valuable for New York; and it's valuable for all the international points that we serve. So we really look at that as a network asset for us.

Thanks. Can I ask one more question, just kind of an update on China, how is that market developing? Are Chinese middle class vacationers starting to become aware of Hawaii as an option?

Yes. I think China's developing well for us. It is -- it starts small. It's growing very, very quickly. But it's large percentages on the relatively small market. From the perspective of the state, I don't think we're yet scratching the surface of what should be a simply huge opportunity here in the islands. But I think it will come.

Thanks, guys.

Mr. Dunkerley, there are no further questions at this time. Would you like to make any closing remarks?

Yes, just to thank everybody for joining us today, and, obviously, we're pleased with our record first quarter results, and the fact that we're signaling that an expectation that the strong results are going to continue for the remainder of 2015, as well as our efforts to strengthen our balance sheet. The $100 million share repurchase program, along with the reduction of our debt levels and so on represent a really permanent and positive changes to our capital structure. And our goal of creating long-term value for our shareholders. So we really appreciate you joining us on today's call. And we certainly hope to be having more calls like this in the future.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.